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Monopoly Answers

1. The document contains examples of monopoly market structures and profit maximization calculations. 2. A monopoly will produce where marginal revenue equals marginal cost to maximize profits. The profit-maximizing quantity and price are identified for several monopoly examples. 3. Deadweight loss, which represents lost consumer and producer surplus, is calculated for monopoly markets and compared to competitive markets. The impacts of different taxes on monopoly profits are also examined.

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223 views4 pages

Monopoly Answers

1. The document contains examples of monopoly market structures and profit maximization calculations. 2. A monopoly will produce where marginal revenue equals marginal cost to maximize profits. The profit-maximizing quantity and price are identified for several monopoly examples. 3. Deadweight loss, which represents lost consumer and producer surplus, is calculated for monopoly markets and compared to competitive markets. The impacts of different taxes on monopoly profits are also examined.

Uploaded by

Ryan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Answer 1

Answer 2

Q = 75 – P /4 1) Since AVC is constant, MC = AVC = 100


•
To maximize profit, a monopolist sets
• P = 300 – 4Q
MR = MC
• MR = 300 – 8 Q (the MR curve has
300 – 8 Q = 100
the same intercept and twice the slope of the
inverse demand curve) Q* = 25
P* = 300 – 4 Q*
= 200

0 1

Answer 2 Answer 2
2) If fixed costs equal $ 2 600, MR = MC will be no
Profit: We must check that profit is positive, different than above ( Q* = 25 ), but profit is:
otherwise the monopolist would do better [200 – 100] 25 – 2600 = 2500 – 2600 = - 100
to shut down The monopolist is losing money and prefers to go
[ P – AVC ] Q- FC = [ 200 – 100 ] 25 – 50 out of business. Even monopoly power may not
= 2500 – 50 be enough to keep a firm profitable with a high
= 2450 fixed costs relative to the size of the market.

2 3

Answer 2 Answer 3

3) MR = MC
1) ( D ) : P = 180 – Q
300 – 8 Q = 200 ( MR ) : P = 180 – 2 Q
Q* = 12.5 MC = 60
P* = 300 – 4( 12.5 )= 250 To maximize profit: MR = MC
Profits are ( 250 – 200 ) 12.5 – 50 = $ 575. The 180 – 2 Q = 60
monopolist will stay open and produce 12.5 Q* = 60
units. P* = 120
e = ( dQ / dP )( P / Q )= -1 (120 / 60) = -2

4 5

1
Answer 3 Answer 4

2) MC = 0
MR = MC  180 – 2 Q = 0 1) Under competition: MC = ATC = 10 ⇨ PE = $10
and QE = 1000 – 50 (10) = 500.
Q* = 90
P* = 90 Under monopoly: profit-maximizing output is MR
= MC
e = ( dQ / dP ) (P / Q) = -1 ( 90 / 90 ) = -1
(D) : P = 20 – Q/50 ⇨ MR = 20 – Q/25
Setting MR = MC: 20 – Q/25 = 10
⇨ Q = 250, P = 20 – 250/50 = 15

6 7

Answer 4 Answer 4

2) Under competition: With tax $2/ unit and a


competitive market, the price to buyers
rises to $12, and the price for sellers
remains unchanged at $10. The equilibrium
quantity:
Q = 1000 – 50 (12) = 400
Under monopoly: new MC’ = 12
Set MR = MC’ ⇔ 20 – Q/25 = 12 or Q’ = 200.
The price to buyers is now P’ = 20 – 200/50
= $16 9

Answer 4

3) The price to the seller is therefore $16 - $2 =


$14. The price to buyers rose by $1 (one-
half the tax) and the price to sellers fell by $1
(one-half the tax). In contrast, with
competition the buyers paid all of the tax.

10 11

2
Answer 5 Answer 5
a) Under perfect competition: P = MC = 60
180 – Q = 60
Q = 120
Under monopoly: MR = MC
180 – 2Q = 60
Q = 60
P = 120
DWL = 0.5 (120 – 60) (120 – 60) = 1 800
12

Answer 5 Answer 5
a) Under perfect competition: Under monopoly: MR = MC
P = MC = 60 180 – 2Q = 60
180 – Q = 60 Q = 60
Q = 120 P = 120
DWL = 0.5 (120 – 60) (120 – 60) = 1 800

14 15

Answer 5 Answer 5
b) Under competition: P = MC DWL = 0.5 (40 – 30) (150 – 120) = $150
180 – Q = 60 + 2Q The reason why this area is DWL is as follows:
Q = 40 CS under competition: acf
P = 140 CS under monopoly: abh
Under monopoly: MR = MC Therefore, the loss in CS due to monopoly: bcfh
180 – 2Q = 60 + 2Q
Q = 30
P = 150
16 17

3
Answer 5 Answer 6

PS under competition: cjf a) (D): P = 1200 - Q


PS under monopoly: bjeh ⇨ (MR): P = 1200 – 2Q
There is a transfer from consumers to producers MC = MR ⇔ 1200 – 2Q = 6Q
of bcgh. The rest of what used to be either CS
or PS is DWL ⇔ Q = 150 and P = 1050
Profit: TR - TC
= P.Q – 3Q2
= 1050. 150 – 3 (150)2 = 90 000

18 19

Answer 6 Answer 6

b) With a lump-sum tax of $50 000, profit c) C = 3Q2 + 40Q ⇨ MC = 6Q + 40


after tax is $40 000: firm stays in busisness. MR = MC ⇔ 1200 – 2Q = 6Q + 40
Since the lump-sum tax is a fixed cost, the Q = 145
firm still sells 150 units (MR and MC are
unchanged) Pc = 1055
With a lump-sum tax of $100 000, profit after Ps = 1055 – 40 = 1015
tax is - $10 000 ⇨ firm is better-off to shut
down in the long run

20 21

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